Central banking and economic growth

When interest rate policy is made useless

Successive reductions of the local interest rate have not only not produced the expected uptake of economic growth. They have also affected the instruments – such as lower yielding Treasury Bills, Government securities — into which institutions like the National Pensions Fund, SICOM, etc., traditionally invest

Leaders of the world’s major central banks met last weekend in Jackson Hole, USA, to discuss their policy options to get their respective countries (US, Europe, Japan) out of the prevailing gloomy economic conditions.

It may be recalled that, after the great financial crisis of 2007-08, the central banks of the world’s major economies have been under pressure to get their economies going once again. In a system riddled by mountains of unsustainable debt across various economies from east to west, central banks have tried to stimulate demand.

They’ve bought up huge piles of questionable debt from governments and the private sector to get the credit markets going again. To no effect. They’ve kept bringing down the interest rate to help businesses pick up more investment and, hence, produce higher economic growth as of yesterday. To no effect.

In the process, they’ve taken interest rates to rock bottom lows near zero per cent, after cutting it sequentially by a quarter per cent on many occasions. Even this has not provoked the inflation they were expecting to spark off as a prelude to a pickup of economic growth. Some (ECB, Japan) even tried taking interest rate into the negative range. The US Federal Reserve has brought it to 0.5% while the UK recently took it down to 0.25% out of fears provoked by the prospect of ‘Brexit’.

The question has been: by keeping lowering interest rates for so long, have they now gone out of ammunitions altogether to address the looming economic problem? The discourse in Jackson Hole went in the direction of asking the fiscal authorities to step up their action. In other words, without admitting it in so many words, the central bankers are slowly admitting that by concentrating on reducing the interest rate successively, they’ve run out of the tether.

Plainly, there’s so much and no more a policy tool such as the interest rate can take to redress an economy refusing to react positively to monetary stimulus in the shape of a low interest rate regime. Real activity is not picking up because of a psychological factor: the masses have lost confidence that anyone among the public institutions is prepared to stand up for them as they become ever more distressed in the face of an establishment unable to do anything significant to reverse large income inequalities and to improve their future prospects.

In fact, the complaint against the local Monetary Policy Committee’s unrelenting efforts to keep bringing down the interest rate in Mauritius to soit-disant stimulate investment and economic growth was felt as a complete lack of regard towards savers. The latter always appeared in the plot as the ones who should cushion the economic shock, which was itself unrelated to the level of the local interest rate. As in the case of the advanced economies, the interest rate was not the lever that would set off a wave of economic growth, which failure the central bankers in Jackson Hole do not want to acknowledge explicitly.

If we look at the situation in Mauritius more closely, successive reductions of the local interest rate have not only not produced the expected uptake of economic growth. They have also affected the instruments – such as lower yielding Treasury Bills, Government securities — into which institutions like the National Pensions Fund, SICOM, etc., traditionally invest their surplus funds from pension contributions. As the returns on their investments dwindle due to this process of lowering interest rates, it is their very ability to pay up pensions that are being placed in jeopardy. The pension payment ability has thus been impaired over so many years of interest rate reduction.

In the circumstances, one can only hope that the imbalance so caused in their finances can, in some years to come, be compensated for were other local investments into which they might place their surplus pick up some time later by generating higher internal rates of return. But this may be dismissed as speculation since we are yet to see light at the end of the economic tunnel. For the present, such public institutions find themselves therefore facing the same lot as savers with a continuously falling interest rate regime. It will be quite late however when and if we will have our own day of Jackson Hole reckoning.

* * *

Who really defend the masses?

Who really defend the masses? Many would answer that it is politicians who are conferred the duty to do this job. If that were so, people in so many parts of the developed and developing world would not currently have been up in arms against politicians. Throwing caution to the winds, voters are prepared to take a gamble on anyone except those who’ve been in the seat already.

Witness the recent downfall of David Cameron in Britain, that of Dilma Rousseff in Brazil. Jacob Zuma of South Africa has just received a stiff warning in recent local elections. Mauritius is no exception to this international tendency. Voters are slowly awakening to abuses by their politicians despite not being able to fully free themselves from certain debilitating clannish associations from the past. If voters manage to enlarge their range of choice in politics, the situation may turn out to be drastically different in future.

The meanderings of politicians is not really my cup of tea. It is they who led the world into two world wars in the 20th century. Some estimates put at over 150 million the number of people killed in the two wars. Has the heavy price so paid by humanity for this madness made the world a more peaceful place to live in? Not at all. Listen to world news with reports of continuing daily massacres of innocent people, helping religious politicians and politicians tout court to quench their thirst for power, ever more power.

At times, it appears humanity is reduced to look for the least evil, among the numerous evils, to lead society. This is exactly the opposite reason for which civil establishment was organised. The objective was to protect the vulnerable and to extend a decent welfare system for a higher fulfilment of life of as many individuals as possible. That required an enlightened and altruistic committed leadership, not grabbers after power or master equivocators with language tricks.

We must nevertheless thank our stars that there have been genuine leaders in the past. Their appeal vis-à-vis the masses was based on hard work, the constant development of a vision how to better the living standards of their fellow citizens, how to inspire noble action by their own deeds and how to share more equitably the fruits of work while shedding the vestiges of the ruthless feudal state.

Little was it realized that the work of such sincere leaders would subsequently be overtaken by a horde of others, more skilful in the art of contriving and twisting words and statements of intent than doing real beneficent actions towards the uplift of the masses, more adept at tricking people into adherence by clever communications exercises than by dedicated devotion to a grand social cause.

As things unfold today, a question keeps coming up: will big corporations and their owners and executives keep getting the better part of the social deal by employing all the tricks they have to get politicians to line the pockets of the companies and those of the politicians themselves? Will a few dictators controlling the rich resources of the earth unleash armies of so-called moral grandstanders to firm up their hold on power, even if that means millions are killed or rendered destitute for the entire life they spend on planet earth?

Anil Gujadhur